MacroEconomics Aggregate Demand and Supply

Question 1

Define Aggregate Demand (1)

Answer 1

The total of all demands or expenditures in the economy at any given price (1)

Question 2

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List the four components of National expenditure for AD (2)

Answer 2

Consumption, Investment (1), Government Spending, and Export - imports (1)

Question 3

Explain some factors influencing consumption (4)

Answer 3

Consumer income (1) - consumers with a higher income would spend more on goods/services (1)

Interest rates (1) - If interst rates are low, it encourages people to save less and borrow more (1)

Question 4

Show the equation for MPC and APC

Answer 4

MPC (Marginal Propensity to Consume) =Change in consumption/Change in income

APC (Average Propensity to Consume) = Consumption/ Income

Question 5

Explain the factors influencing Investment

Answer 5

Interest rates (1) - Low interest rates makes borrowing cheaper boosting consumer spending so business confidence

Corportation Tax (1) - Lower corporation tax means that more firms will invest more as less profit will be taken as tax

Question 6

Explain the difference between Gross and Net investment (2)

Answer 6

Gross investment is spending on captial goods Before depreciation is considered (1)

Net investment is spending on capital goods After depreciation is considered (1)

Question 7

Explain the impact of falling business confidence in the pandemic on UK investment and aggregate demand (refer to Animal Spirits) (4)

Answer 7

Businesses may hesistate to
expand operation due to economic uncertainty (1) which can limit opportunites such as job creation (1) Consumer confidence and their animal spirits may decrease as well leading to less spending (1) leading to aggregate demand to fall (1)

Question 8

Explain the reasons why government expenditure may have risen between 1998-2007 (3)

Answer 8

The government may have increased spending on infrastructure projects (1) such as transportation or housing (1) to support economic growth and improve living standards (1)

Question 9

Define Net exports (1)

Answer 9

The value of exports - value of imports (1)

Question 10

Explain the reasons why government expenditure may have risen between 2007-2009 (3)

Answer 10

The financial crisis caused a significant decrease in economic activity as the crisis depened (1), governments increased spending to stabilize their economies (1) such as spending on unemployed benefits for the unemployed (1)

Question 11

Explain why a rise in tariffs on goods in key UK export markets could affect the UK’s net exports and one reason evaluation for each point (4)

Answer 11

Higher tariffs make british goods more expensives for consumers reducing their affordability and demand (1). This can lead to a decrease in the quantity in UK exports, resulting in a trade deficit (1)

However UK products may be higher quality compared to others (1) so consumers will continue to purchase them (1)

Question 12

List and Explain the reasons why aggregate demand slopes downwards (4)

Answer 12

The real balance effect (1) - an increase in the average price level reduces the purchasing power of households, businesses, and government reducing quantity of real output demanded (1)

Interest rate arguments (1) - at higher average prices, the interest rate is likely to be higher, meaning businesses will invest less and consumers will consume less (1)

Question 13

Explain what happens to UK aggregate demand when there is an increase in business confidence (2)

Answer 13

Increase in business confidence will lead to the business investing more into capital (1) allowing for an increase in GDP and a boosting in aggregate demnd (1)

Question 14

Explain what happens to UK aggregate demand when there is a reduction in budget deficit (4)

Answer 14

This may cause the government to increase taxes (1) having an impact on households and businesses reducing their disposable income (1) potentially leading to lower consumer spending and business investment (1) both of which contribute to Aggregate Demand (1)

Question 15

Define Short- Run Aggregate Supply (2)

Answer 15

The total planned output when the price level can change (1) but the prices and productivity of factor inputs are held constant (1)

Question 16

List what the Cost of Productions of fims can affect (2)

Answer 16

Imported Raw materials (1)
Energy Costs (1)

Question 17

Explain the impact of a fall in global oil prices on the SRAS Curve (2)

Answer 17

Firms with lower production costs due to cheaper oil can offer goods/services at lower prices (1) making them more competitve which can stimulate production and supply (1)

Question 18

Explain the impact of a fall in the exchange rate on the SRAS curve (2)

Answer 18

This would make a countrys currency weaker compared to other currencies (1). This makes imports more expensive because it takes more of the local currency to purchase the same foreign goods (1). As import cost rise firms may find it expensive to purhcase raw materials and intermediate materials from abroad (1) increasing production costs (1).

Question 19

Define LRAS (Long- Run Aggregate Supply (2)

Answer 19

The total planned output when both prices and average wage rates can change (1) . It is a measure of the country’s productive potential (1)

Question 20

Define ‘Sticky Wages’ (2)

Answer 20

A situation where the wages of employees do not adjust quickly (1) in response to changes in the overall economic conditions such as inflation (1)

Question 21

Give reasons as to why there could be ‘sticky wages’ in the economy (4)

Answer 21

Work resistance (1) - employees may resist wage reductions leading employers to avoid lowering wages during economic downturns to maintain morals (1)

Expensive (1) - it can be costly for firms to constantly renegotiate wages as the expenses associated with changing wage rates, updating contracts may discourage frequent wage changes (1)

Question 22

How are the views of Keynesianism different from the Classical School (4)

Answer 22

Keynesian emphasizes the government intervention as it suggests that in times of economic downturn (1), the government should increase spending to stimulate demand (1)

Classical school argues that markets will naturally adjust to full employment (1) and that government intervention is often unecessary or even harmful (1)

Question 23

Explain factors that cause a shift in LRAS (4)

Answer 23

Technological Advances (1) - if there are there technological advances such as better production machinery, this will boost the quality of capital boosting the productive potential of the economy and LRAS as more can be produced with these more productive and efficient capital goods (1)

Education and Skills (1) - if education and skill of the UK workforce increases there will be an increase in the quality of labour. This will boost the productive potential and LRAS as labour productivity will have risen meaning higher production for a given number of workers in the UK workforce (1)

Question 24

What limitations are there of keynesian policies (2)

Answer 24

It takes time for the government to recognize economic problems decide an appropiate policies and then put those policies into effect (1) . By the time those actions take effect, economic conditions may have changed (1)

Question 25

With reference to the multiplier effect, what does keynesian suggest policymakers should do in response to a recession (3)

Answer 25

He would suggest increasing government spending and/or reducing taxes **(1)**.This injection of funds into the economy encourages increased consumption and investment **(1)** creating a positive cycle that helps pull the economy out of a downturn **(1)**

Question 26

Explain the advantages and disadvantages of keynesian Policy

Answer 26

***ADVANTAGES*** Counteracting Unemployment **(1)**- Increased government spending can stimulate employment by creating public works projects and boosting overal demand for goods and services Consumer and Business Confidence **(1)** - By actively managing demand through government spending or tax policies, keynesican economics seeks to maintain stable consumer and business confidence, promoting economic growth ***DISADVANTAGES*** Budgetary Concerns **(1)** - increased government spending during economic downturns can strain public finances, and if not managed carefully, it might result in long - term debt issues Dependence on Government Decision making **(1)** - relying on government intervention requires effective and tiely decision - making. If policies are not implented correctly or are subject to political gridlock, their effectiveness can be compromised

Question 27

Define Equilibrium Real National Output (1)

Answer 27

The real national output level where planned aggregate demand equals aggregate supply (1)

Question 28

Explain the impact of a successful expansion of apprenticeship schemes (3)

Answer 28

This can fill in skill gaps in the labour market reducing unemployment over the long term **(1)**. A lower level of unemployment can contribute to a more efficient utilization of resources **(1)** shifting the LRAS Curve to the right **(1)**

Question 29

Explain the impact of Depreciation exceeding gross investment on the LRAS Curve (3)

Answer 29

A decline in the capital stock may result in outdated or insufficently maintained machinery and infrastructure **(1)** which can lead to lower productivity levels **(1)** reducing the economy's potebtial output over the long term **(1)**

Question 30

Discuss the macroeconomic effects on the UK economy of an increase in net migration into the UK such as from Bulgaria and Romania (4)

Answer 30

An increase can contribute to overall economic growth by contributing to consumer spending and housing demand **(1)** further stimulating economic activity **(1)** However, it requires effective policy management to address potential challenges **(1)** and ensure the overal well-being of both migrants and the host country's population **(12)**

Question 30

Explain one factor that could cause rising consumption in the UK (2)

Answer 30

An increase in consumer confidence can lead to an increase in consumption as when consumers feel more optimistic about their economic prospects **(1)**, they are more likely to spend more on goods and services **(1)**

Question 31

Explain how 'animal spirits' may have contributed to the significant fall in business investment (2)

Answer 31

When businesses go through states such as economic instability or negative future expectations, their animal spirts may decrease leading to a reluctance to expand operations **(1)**. This could result in a pullback on investments contributing to a significant decline overal business investment **(1)**

Question 32

Explain the difference beteen net investments and gross investment (2)

Answer 32

Gross investment is the total expenditure on new capital **(1)** while net investment takes into account the depreciation of existing capital asets **(1)**

Question 33

Explain why government spending may automatically fall when the economy is experiencing fast economic growth (4)

Answer 33

Increased Tax Revenues **(1)** -Fast economic growth leads to higher income profits and overall economic activity **(1)**. As a result tax revenus increase so with more funds going into government coffers **(1),** there may be less pressure for the government to maintain or increase its spending levels **(1)**

Question 34

Explain the difference between actual growth and potential growth (2)

Answer 34

Actual growth reflects the real expansion or contraction an economy experiences over a specific period **(1)** Potential growth represents the sustainable maxiumum growth rate a healthy economy can achieve over the long term **(1)**

Question 35

Explain the impact of negative net investment on long-run aggregate supply (2)

Answer 35

Technological Stagnation **(1)** - This can slow down the development and adoption of innovations that are crucial for long-term economic advancement **(1)**

Question 36

Increases in long run aggregate supply will ceteris paribus cause a decrease in : (1)

Answer 36

A. International competitiveness **B. The price level** C. Economic growth D. The level of full employment

Question 37

An improvement in technology is likely to cause (1)

Answer 37

**A) An increase in potential growth, due to rising long-run aggregate supply** B) An increase in actual growth, due to falling short-run aggregate supply C) A decrease in potential growth, due to falling long-run aggregate supply D) A decrease in actual growth, due to rising short-run aggregate supply

Question 38

According to the Classical school, in the long-run an increase in aggregate demand will (1)

Answer 38

A) Increase real output **B) Only be inflationary** C) Decrease real output D) Only be delationary

Question 39

Despite a fall in the exchange rate, UK net exports rose very little. One reason for this could be high (1) :

Answer 39

A) Economic growth in the Eurozone B) International competitiveness of UK firms C) Number of UK firms focused on the domestic market D) Price elasticity of demand for UK exports